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Housing chief urges caution on finance overhaul
April 14, 2010 / 5:30 PM / 8 years ago

Housing chief urges caution on finance overhaul

WASHINGTON (Reuters) - Abruptly changing the structure of mortgage finance giants Fannie Mae and Freddie Mac would likely lower home prices and could threaten the fragile U.S. economic recovery, Housing and Urban Development Secretary Shaun Donovan said on Wednesday.

Donovan’s testimony comes as the Obama administration begins to debate a complete overhaul of the government’s role in housing finance, including the fate of Fannie Mae FNM.N and Freddie Mac FRE.N.

“We cannot move hastily on an issue as complex as this,” Donovan said at a hearing on the future of housing finance before the U.S. House Financial Services Committee.

The government seized control of Fannie and Freddie, the two largest purchasers of U.S. home loans, in September 2008, as the deepest housing crisis since the Great Depression forced a tidal wave of mortgage delinquencies and foreclosures that have eaten away at their capital.

The government has since injected more than $125 billion into the two agencies and billions more are likely to be needed.

Donovan said that despite the past mistakes of the two firms, there should be no doubt that they continue to play an important role in stabilizing the U.S. mortgage market.

Fannie and Freddie agree to purchase mortgages outright from lenders or bundle them into mortgage securities, practices that relieve banks of the risks of the mortgages and free up their balance sheets to allow them to make new loans.

Without Fannie and Freddie, it would be harder for prospective buyers to get loans, pushing home prices lower and damaging the overall U.S. economy. The two companies guarantee about half of all U.S. residential mortgages and have a mission under their Congressional charters to foster affordable housing.

“The (housing) market is still quite fragile,” Donovan said, “We cannot do something that would cause this market to fall further.”

Including Federal Housing Administration-backed loans, the government is in some way backstopping about 90 percent of U.S. home loans.

Republicans on the committee expressed frustration at the administration’s cautious approach, which includes a set of seven questions released on Wednesday seeking public comment on how best to move forward.

“Don’t you agree that the time for asking questions is over?” asked Representative Spencer Bachus of Alabama, the panel’s top Republican.

Donovan said the affordable housing goals of Fannie Mae and Freddie Mac did not cause their demise, but rather their quest for profits and insufficient capital reserves were more instrumental in their downfall.

Donovan said he expected a full public debate on what the government’s role in housing finance should be to take place this year and any legislative changes would not occur until 2011.

Additional reporting by Kevin Drawbaugh, Editing by Leslie Adler

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